The day-to-day demands of running a business can make it difficult to think about the future. And by “future,” we’re not necessarily talking about how your tax liability will look at year-end or how you might grow the bottom line over the next five years. We’re referring to the future in which you no longer own your company.
Succession planning is an important task for every business owner. And it’s never too early to start thinking about three of the most critical factors.
1. The involvement of your family
Among the primary questions you’ll need to answer is whether you want to transfer ownership of the company to a family member or sell it to either someone already in the business or to an outside party.
If your children are involved in the business, or there’s another logical successor from within the family, you’ll want to start mentoring this person long before you want to step down. An intrafamily successor should be someone who objectively has the education, training, experience and temperament to fill your shoes. Depending on the amount of support your replacement needs, it may take years for this individual to be truly ready.
Also bear in mind that succession planning and estate planning are linked. You’ll want to create a clear, legally defensible ownership transfer plan while you also fund your retirement or next stage of life. In addition, you need an estate plan that equitably divides your wealth among family members who participate in the business and those who don’t.
2. The market for your company
If it appears unlikely that you’ll transfer ownership to a family member, you’ll probably want to sell your company. The primary question then becomes: Will there be a market for it when you’re ready to leave? If mergers and acquisitions are relatively common in your industry, you may have little to worry about. But if companies like yours tend to be a tough sell, you might be in for a long and perhaps frustrating process.
To put yourself in a better position, start developing a list of potential buyers well before you’re ready to depart. These may include competitors, business associates and private equity firms. Essentially, you need to get a good idea of the “size and shape” of the market for your company so you can fine tune your succession plan.
3. The structure of the transfer or sale
If you do decide to name a family member as your successor, you’ll need to work with an attorney, CPA and perhaps other advisors to transfer ownership in a legally secure, tax-savvy manner that also accounts for your estate plan.
On the other hand, if you’re going to sell the company (or ownership shares) to someone outside your family, you’ll need to structure the deal carefully. One option is to sell the business to your employees over time via an employee stock ownership plan (ESOP). But ESOPs come with many rules and complexities.
Alternatively, you might set up a purchase via an internal buy-sell agreement that stipulates your partners (if you have them) must buy your shares. Or you could sell to one of the potential buyers mentioned above — again, typical parties include competing businesses, perhaps someone you know through networking or private equity firms.
The specifics of stepping down
Granted, these three factors are general in nature. There will be many specifics that your succession plan will need to cover as you get closer to stepping down. Contact AHP for further information.
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